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Malcolm8X wrote:Hmmmm... Very interesting. I see how the near freeze in liquidity from the crash temporarily devastated the legal market.

It's not just that clients stopped paying, which is a problem b/c firms don't collect on a week to week basis from institutional clients.

But more importantly, law firms are highly leveraged. Firm pay out all the reserves at the end of the year to pay off loans, rent, year end salary, bonuses (etc), and whatever is left goes into the partner's pocket. Then they take out loans at the beginning of the year to meet overhead etc.

When there is a credit crisis and liquidity stops a few things happen which disrupt the above model.

1. Creditors might call back loans -- in which case firms will have to tap into their reserves. If they don't have enough partners willing to go into their own personal savings to make up the debt the firm goes insolvent. This is how Heller collapsed -- it wasn't that the firm was losing money per se, they had a liquidity problem

2. Creditors stop loaning. Firms are like corporations and they need to borrow short term cash to make payroll/overhead costs/rent etc. Like corporations, many firms get this cash from the money markets. When Lehman collapsed, the money market funds seized up as everyone pulled their cash from it and moved them to t-bills. Firms that lacked enough money (or partners willing to front the cash) had to cut costs by laying off staff. Otherwise they'd have to tell all the associates/staff that they won't be able to make payroll this month.

Maybe this is an anomaly, but I haven't heard of too many firms having to take out loans at the beginning of the year. Generally when a firm receives money from a client they put it in their trust. Then the hours billed are billed against the trust. Most firms adjust their rates to the value of the trust- bill higher per hour if there is more money and excess work. If they depleted their trust at the end of the year with bonuses then they deserve anything that comes to them if the work dries up. It could be that my dealings are mostly with the feast or famine PI firms. As a small firm PI attorney you can make seven figures in a year or less than six depending on how the chips fall.

Malcolm8X wrote:Hmmmm... Very interesting. I see how the near freeze in liquidity from the crash temporarily devastated the legal market.

It's not just that clients stopped paying, which is a problem b/c firms don't collect on a week to week basis from institutional clients.

But more importantly, law firms are highly leveraged. Firm pay out all the reserves at the end of the year to pay off loans, rent, year end salary, bonuses (etc), and whatever is left goes into the partner's pocket. Then they take out loans at the beginning of the year to meet overhead etc.

When there is a credit crisis and liquidity stops a few things happen which disrupt the above model.

1. Creditors might call back loans -- in which case firms will have to tap into their reserves. If they don't have enough partners willing to go into their own personal savings to make up the debt the firm goes insolvent. This is how Heller collapsed -- it wasn't that the firm was losing money per se, they had a liquidity problem

2. Creditors stop loaning. Firms are like corporations and they need to borrow short term cash to make payroll/overhead costs/rent etc. Like corporations, many firms get this cash from the money markets. When Lehman collapsed, the money market funds seized up as everyone pulled their cash from it and moved them to t-bills. Firms that lacked enough money (or partners willing to front the cash) had to cut costs by laying off staff. Otherwise they'd have to tell all the associates/staff that they won't be able to make payroll this month.

Maybe this is an anomaly, but I haven't heard of too many firms having to take out loans at the beginning of the year. Generally when a firm receives money from a client they put it in their trust. Then the hours billed are billed against the trust. Most firms adjust their rates to the value of the trust- bill higher per hour if there is more money and excess work. If they depleted their trust at the end of the year with bonuses then they deserve anything that comes to them if the work dries up. It could be that my dealings are mostly with the feast or famine PI firms. As a small firm PI attorney you can make seven figures in a year or less than six depending on how the chips fall.

Don't say that. Now there's gonna be a hoard of TLSers (including myself) trying to figure out what type of PI work you do. But it does make sense that different firms have different ways of handling their overhead. Given these two different options (and possibly boat loads more), I now wonder what the most common way of doing business is.

Malcolm8X wrote:Hmmmm... Very interesting. I see how the near freeze in liquidity from the crash temporarily devastated the legal market.

It's not just that clients stopped paying, which is a problem b/c firms don't collect on a week to week basis from institutional clients.

But more importantly, law firms are highly leveraged. Firm pay out all the reserves at the end of the year to pay off loans, rent, year end salary, bonuses (etc), and whatever is left goes into the partner's pocket. Then they take out loans at the beginning of the year to meet overhead etc.

When there is a credit crisis and liquidity stops a few things happen which disrupt the above model.

1. Creditors might call back loans -- in which case firms will have to tap into their reserves. If they don't have enough partners willing to go into their own personal savings to make up the debt the firm goes insolvent. This is how Heller collapsed -- it wasn't that the firm was losing money per se, they had a liquidity problem

2. Creditors stop loaning. Firms are like corporations and they need to borrow short term cash to make payroll/overhead costs/rent etc. Like corporations, many firms get this cash from the money markets. When Lehman collapsed, the money market funds seized up as everyone pulled their cash from it and moved them to t-bills. Firms that lacked enough money (or partners willing to front the cash) had to cut costs by laying off staff. Otherwise they'd have to tell all the associates/staff that they won't be able to make payroll this month.

Wow. That's remarkable stuff. I don't see why firms allow themselves to get SO leveraged when they got so much capital flowing in yearly. I guess the overly leveraged ones failed, the rest learned a lesson. This indicates to me that big law was just completely caught off guard by the depth of the recession. Hopefully everybody learned a lesson.

Not really. The partnership can make more profits through leverage. When things fall apart, they just lay off their associates and maybe cull a few weak partners. When things pick back up they simply hire more associates from the plentiful supply of law grads. Most partnerships emerged more profitable than ever as a result of the recession.